HOW IS CREDIT LIMIT DETERMINED? A COMPLETE GUIDE
Of all the Americans who have a credit card, 55% of them have debt.
Even though getting a credit card is a great way to boost your credit and learn to manage your finances better, what your credit limit is can significantly affect how you use your card.
So how is credit limit determined?
Whether you have a particularly low credit limit or your limit was recently raised, many factors go into setting a credit limit.
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Keep reading to learn all about how credit limit is determined.
What Is a Credit Limit?
The maximum amount you’re allowed to have on your card at any given time is your credit limit. New credit card users with little to no credit may start with limits around $500.
An established broker with a high salary, on the other hand, might be granted limits upwards of $100,000. Thus, your credit limit significantly affects what purchases you can make.
Once you reach your credit limit, the creditor won’t allow you to make additional purchases until you pay off some of your balance and open up more room for spending. Some creditors do enable users to make purchases that go over the limit, but it’s not common.
The Amount You Spend Affects Your Credit
One essential thing to remember about limits and credit cards is that the closer you get to your limit, the more it’ll impact your credit score.
Say you have a credit limit of $10,000, and you buy a motorcycle, using your card, for $9,000. As long as you pay back that amount before your bill is due, it’s not going to impact your credit for the worse. But, if month after month, all you do is pay the minimum payment on that debt, your credit will start to go down.
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Even if you have a limit of $1,000 and a balance of $800, you’re using 80% of your credit, which is too much to maintain excellent credit standing. Lenders prefer to see a utilization rate of 30% or less.
Some Credit Cards Have Standard Limits for All
Certain credit cards have a standard limit, like $2,000, for example. Every approved cardholder receives this limit, regardless of additional factors.
Some credit cards have a limit rate and approved cardholders get assigned a limit within that range. Well-qualified applications will get approved for a limit on the higher end of the spectrum, whereas other approved applications will fall in the lower to middle range.
Credit card issuers don’t publish or reveal limits for credit cards, so the only way you can find out what other users are approved for is by going on forums and reading reviews.
Now let’s take a look at all the factors that determine your credit limit.
Your Income Is a Primary Factor
The amount of money you make will affect the amount a creditor will deem you can pay. But even though you have a better chance of being granted approval for a high limit if you have a high income, there’s no guarantee.
Other factors, like the type of credit card for which you are applying and your credit utilization rate, also come into play.
Your Credit History
Most creditors check your credit reports and annual income level to decide your credit limit. Some of the factors issuers will look at are:
- The length of your credit history
- Your repayment history
- The number of credit accounts on your report
- Mortgages, student loans, auto loans, and personal loans
- The number of inquiries on your credit report
- The number of derogatory marks on your credit report (collections, bankruptcies, tax liens, etc.)
How you’ve handled your other credit cards, and limits on other accounts will affect both the limit you’ll be approved for, and whether or not you qualify at all.
Things like late payments and high balances portray you as risky for the lender. The more delinquencies you have in your credit history, the less likely you’ll be approved for a higher limit.
That being said, there are options and credit cards for people with bad credit.
Your Debt-To-Income Ratio
Your income alone doesn’t determine your credit score. But your debt-to-income ratio does. When you apply for a credit card, a lender will look at your DTI ratio to determine whether you make enough money to pay your credit card bill.
They’ll look at your existing recurring monthly debt with respect to your gross monthly income.
Things like rent, car payments, mortgage payments, credit card payments, alimony payments, and student loans all come into play here. If, after all those payments, you don’t have enough to pay a new credit card bill, the chances are that you won’t be approved for a new high-limit card.
You really shouldn’t be spending more than 28% of your income on housing. And your DTI, which includes ALL your debt, should never exceed 36% of your gross income.
Cards That Have Preset Amounts
Earlier in this article, we mentioned cards with preset amounts. These lenders offer applicants a variety of cards to choose from, and each one comes with a predetermined amount.
A lot of companies have a classic green or blue card with a $1,000 limit, a gold card with a $2,000 or $3,000 limit, and then an elite card with a $5,000, for example.
Applicants can apply for the elite card, but their income level, credit score, and other factors we mentioned determine whether or not they’ll get approved for that card. Someone who doesn’t get approved for the elite card may get approved for the lower-limit card.
Credit card companies want people to repay their debt, so they aren’t going to over-lend.
There are some elite credit cards that boast a “no preset spending limit.” That means that while you aren’t given a definite limit, you can’t exactly spend with abandon. It’s a floating limit that changes with your income and other factors impacting your credit.
If you get approved for such a card, the issuer might tell you what your minimum limit is, rather than the maximum.
There are exclusive credit cards, some of which are only available by invitation only. While they come with fantastic perks, there are often high annual fees and minimum spending requirements, which must be met yearly.
How to Apply for Increased Funds
Some credit card lenders will tell you what your limit is as soon as you’re approved, whereas others will relay that information in the envelope carrying your new card.
Either way, don’t make any big plans for your new card until you know what your limit is going to be.
If your initial limit is low, know that it’s not the limit you’ll be stuck with forever. If you use your card responsibly for more than a few months, the issuer might automatically raise your credit limit.
Your best chance at getting an automatic limit raise is to make sure you always pay most of your bill each month, use your credit card regularly, and don’t max it out.
Not all credit card issuers will automatically increase a limit. Sometimes you have to call to request an increase or do so on their website or app.
It’s usually pretty simple to do so, but you might have to update your income or provide other information. Once they process your request, they’ll let you know whether or not your request is approved.
If it isn’t approved, your credit card issuer will send a letter in the mail or an email that details why they aren’t approving you. If it’s your credit score that is the main reason for getting rejected, you’ll get a copy of the score that was used. That issuer may have a set amount of time you have to wait before re-applying, but don’t be discouraged by a “no.”
If you get denied, just work hard towards paying off your debt and repairing your credit score.
How Is Credit Limit Determined?
How is credit limit determined? Well, there are several factors involved. Things like credit history, income, available credit, and delinquencies all come into play when a lender decides whether or not to give you a credit card.
Regardless of how financially responsible you are, first-time credit cards usually have lower limits, so don’t be discouraged if that’s you. Paying off your entire debt monthly, making those payments on time, and being responsible in other financial aspects of your life will all help you to get a higher limit.